ClicktoeditMastertitlestyle英文版

Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 7
What’s the goal of cash management?
To meet above objectives, especially to have cash for transactions, yet not have any excess cash.
SKI Industry
Current
1.75x 2.25x
Quick
0.83x 1.20x
Debt/Assets
58.76% 50.00%
Turnover of cash & securities 16.67x 22.22x
DSO (days)
45.00 32.00
Inv. turnover
4.82x 7.00x
To minimize transactions balances in particular, and also needs for cash to meet other objectives.
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
(More…)
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 11
If a firm with 4 days of net float writes and receives $1 million of checks per day, it would be able to operate with $4 million less capital than if it had zero net float.
Definitions
16 - 1
Gross W.C.: Total current assets.
Net W.C.: Current assets – Current liabilities.
W.C. Policy: Decisions as to (1) the level of each type of current asset, and (2) how current assets will be financed.
Float is the difference between cash as shown on the firm’s books and on its bank’s books.
If SKI collects checks in 2 days but those to whom SKI writes checks don’t process them for 6 days, then SKI will have 4 days of net float.
16 - 6
Cash doesn’t earn a profit, so why hold it?
1. Transactions: Must have some cash to operate.
2. Precaution: “Safety stock.” But lessened by line of credit, marketable securities.
All rights reserved.
16 - 5
Cash Conversion Cycle
Inventory Receivables Payables
CCC = conversion + collection – deferral
period
period
period
CCC
=
Days per year Inv. turnover
4. Forecast of cash expenses, taxes, etc.
5. Initial cash on hand.
6. Target cash balance.
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 14
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 3
How does SKI’s working capital policy compare with the industry?
Working capital policy is reflected in current ratio, quick ratio, turnover of cash and securities, inventory turnover, and DSO.
Timing: Daily, weekly, or monthly, depending upon purpose of forecast. Monthly for annual planning, daily for actual cash management.
Copyright © 2001 by Harcourt, Inc.
These ratios indicate SKI has large amounts of working capital relative to its level of sales. SKI is either very conservative or inefficient.
Copyright © 2001 by Harcourt, Inc.
$16,857.64 18,311.85
$35,169.49 1,500.00
$33,669.49
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 16
Should depreciation be explicitly included in the cash budget?
All rights reserved.
16 - 4
Is SKI inefficient or just conservative?
A conservative (relaxed) policy may be appropriate if it leads to greater profitability.
January
Cash at start if
no borrowing $ 3,000.00
Net CF (slide 15) 13,857.64
Cumulative cash $16,857.64
Less: target cash 1,500.00
Surplus
$15,357.64
February
3. Compensating balances: For loans and/or services provided.
4. Speculation: To take advantage of bargains, to take discounts, etc. Reduced by credit lines, securities.
Negotiate a line of credit (also reduces need for “safety stock”).
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 10
What is “Float” and how is it affected by the firm’s cash manager?
W.C. Management: Controlling cash, inventories, and A/R, plus S-T liability management.
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 2
Selected Ratios--SKI Inc.
No. Depreciation is a noncash charge. Only cash payments and receipts appear on cash budget.
However, depreciation does affect taxes, which appear in the cash budget.
All rights reserved.
16 - 13
Data Required for Cash Budget
1. Sales forecast.
2. Information on collections delay.
3. Forecast of purchases and payment terms.
Rent
2,500.00 2,500.00
Total payments $53,794.31 $44,443.55
Net CF
$13,857.64 $18,311.85
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 15
Cash Budget (Continued)
+
Days sales outstanding
Payables
– deferral period
CCC = 360 + 45 – 30 4.82
CCC = 75 + 45 – 30
CCC = 90 days.
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
(More…)
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 9
Increase forecast accuracy to reduce need for “safety stock” of cash.
Hold marketable securities (also reduces need for “safety stock”).
However, SKI is not as profitable as the average firm in the industry. This suggests the company has excessive working capital.
Copyright © 2001 by Harcourt, Inc.
16 - 8
Ways to Minimize Cash Holdings
Use a lockbox.
Insist on wire transfers from customers.
Synchronize inflows and outflows.
Use a rБайду номын сангаасmote disbursement account.
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
16 - 12
Cash Budget: The Primary Cash Management Tool
Purpose: Forecasts cash inflows, outflows, and ending cash balances. Used to plan loans needed or funds available to invest.
SKI’s Cash Budget for January and February
Net Cash Inflows January February
Collections $67,651.95 $62,755.40
Purchases
44,603.75 36,472.65
Wages
6,690.56 5,470.90
F. A. turnover
11.35x 12.00x
T. A. turnover
2.08x 3.00x
Profit margin
2.07% 3.50%
ROE
10.45% 21.00%
SKI appears to have large amounts of working
capital given its level of sales.